British banks face a new mauling from mortgage defaults by US middle classes

Friday 6 February 2009 09:30 BST

After subprime comes Alt-A. Fears are growing that British and European banks will be hit by a second wave of huge losses, caused by defaults in the US on what are known as Alternative-A mortgages.

Ranking between prime and subprime, Alt-A loans were taken out by the middle classes. As the recession deepens and more white-collar workers lose their jobs, the number of repossessions in more well-heeled areas has soared. British banks Lloyds, Barclays and Royal Bank of Scotland have total Alt-A exposure of at least £12.5billion.

Credit rating agency Moody's has set alarm bells ringing by downgrading the value of Alt-A debt because it has seen an "unprecedented" number of borrowers falling behind with repayments, and losses increasing.

David Watts at London research firm CreditSights, said: "The performance of Alt-A loans is clearly deteriorating rapidly, and we believe that 2009 will see such mortgages worsen further."

Watts estimates that $600billion (£407billion) of Alt-A debt is outstanding and $150billion may need to be written off. British banks have already written down some of the losses.

Analysts had regarded Alt-A as safer than subprime because borrowers had better credit histories. But they were often encouraged to borrow more.

A Moody's report warned: "A sizeable proportion of transactions backed by these Alt-A mortgages have performed similarly to subprime mortgage securitisations.

"The loans backing 2006 and 2007 Alt-A securitisations have shown substantial increases in serious delinquencies and decreases in prepayment rates that are unprecedented for the asset class."

Sandy Chen at Panmure Gordon said: "The problem with Alt-A has been buried by all the other bad news we've had in the last few months."

Lloyds is the most exposed of the British banks with more than £7billion of Alt-A. Its HBOS subsidiary has £6.75billion while the Lloyds TSB arm has £619million.

Barclays' latest interims say it has exposure of £3.7billion. Broker RBS Hoare Govett last week warned that Barclays' "large Alt-A portfolio is perceived to be inadequately written down".

RBS has £1.59 billion of Alt-A but HSBC and Standard Chartered are thought to have relatively little direct exposure.

British banks' problems are dwarfed by those of some of their European counterparts. ING has a €27.7billion (£24billion) portfolio of Alt-A. UBS held as much as $26.6billion, but is understood to have managed to offload much of the paper at a discount.